15 Σεπτεμβρίου 2014

[Accountancy Cyprus, No. 116, September 2014.]Two important financial milestones marked the summer
of 2014. In June, Cyprus tapped international capital markets for the first
time since January 2010, raising €750 million of fresh funds. The return to the
markets after a 4.5 year absence was certainly a significant and gratifying event,
not because it took place just 15 months after the big shock of March 2013.

One of the reasons for this success is that the Cypriot
economy is faring much better than almost anyone expected; the fiscal situation
has improved substantially and the recession is not as deep as feared. The strict
implementation of the Memorandum of Understanding (MoU) has proven successful
in bringing stability to the country and has contributed to the improvement in
the international image and credibility of Cyprus.

The return of investor confidence in international
markets was another important contributing factor. The markets are flush with
liquidity, bond yields are very low and international investors are looking for
investments that will deliver some return without undue risk. The timing was very
good for Cyprus and the government wisely seized the opportunity. The success improved
the image of Cyprus abroad and at the same time provided a psychological boost at
home.

But perhaps the most important consequence of the bond
issue is that it paved the way for Cypriot banks – particularly the Bank of
Cyprus – to tap international markets themselves. The Finance Minister made
this point emphatically at the time, which suggests that pushing the banks in
this direction might have been one of the government’s prime motivations all
along.

Intentional or not, the Bank of Cyprus got the message
and quickly moved to issue new capital. This process was concluded at the end
of August, when the bank’s shareholders approved the injection of €1 billion in
additional share capital. The successful conclusion of the capital increase was
the second major event of the summer. It puts the bank in a very strong
position with a core Tier 1 capital in excess of 15% that will allow it to
absorb any losses due to declines in the value of its assets, particularly the
loan portfolio.

These developments are certainly positive, but the
road ahead is still long and full of challenges. In a sense, fixing our fiscal
house was the easy part. Raising tax rates and cutting expenditures are
relatively straightforward things to do. Implementing structural reforms is much
more difficult, both for practical and for political reasons.

The practical aspect is that structural reforms (such
as privatizations, implementation of the national health system, public sector
reform, etc.) are complex endeavors that require resources and commitment from
the government. Politically, these issues are also much more sensitive because
they impact powerful entrenched interests that will not go down without a
fight. We have already seen this in the vocal protests against privatizations;
but opposition to reform is working in more subtle ways in other areas also.

The difficulty of reform is exacerbated by the fact
that the government does not have a majority in parliament. This has been made
painfully obvious in the endless wrangling about the foreclosure law. In any
other country, the government would only have to convince its coalition
partners. In Cyprus the government has to struggle to convince one or more of
the opposition parties to support its bills. This state of affairs has been an
almost permanent feature of our political system and is probably the main
reason why practically no major reforms have ever been implemented in Cyprus in
the absence of outside pressure. Political uncertainly could be a major
obstacle as we try to implement the most difficult aspects of the MoU.

The improvement in public finances and the successful
return to the markets have led to suggestions that Cyprus may be able to exit
the program ahead of time, in 2015 instead of 2016. It is true that a key
objective of the MoU is to support Cyprus until it can finance itself. But an
equally important objective is to reform the economy and to build the
foundations that will put Cyprus on a path of sustainable growth. Major
challenges still lie ahead: privatizations; public sector reform; implementation
of the national health system; further stabilization of the financial sector;
and thorny negotiations over COLA and civil service pay and benefits.

We must not get ahead of ourselves. The measure of our
success should not be the time that we will exit the program but the extent to
which we will improve the institutions and strengthen the foundations of the
Cypriot economy.